PowerSchool Holdings Inc
NYSE:PWSC
Earnings Call Analysis
Q3-2023 Analysis
PowerSchool Holdings Inc
PowerSchool, a player in the K-12 software market, is ardently working to increase its market penetration beyond the current 6% of the $10.5 billion addressable market in the U.S. and Canada. The company's ambition doesn't stop there; with international expansion and tailored education, the total addressable market swells nearly tenfold to $100 billion. To thrive, PowerSchool has articulated a clear go-to-market strategy and flaunted a product roadmap teeming with AI and personalized education products designed to revolutionize the industry. A midterm financial target is set, looking to exceed $1 billion in revenue by 2026 while also expanding EBITDA and free cash flow margins.
In the third quarter, PowerSchool delivered emphatically with double-digit revenue growth, margin expansion, and record cash flow generation. A standout performance in data and analytics solutions, spurred by the back-to-school period, propelled the company's total revenue to $182 million, a 12% year-over-year increase, surpassing their own guidance. The various sectors—subscriptions, services, and license revenues—each contributed strongly to the quarter's triumph. Notably, the year's free cash flow margin improved to 19%, compared to 15% previously, showcasing the company's effective operational strength. Looking at the year ahead, PowerSchool has elevated its full-year guidance for both revenue and adjusted EBITDA, signaling a persuasive trajectory toward growth and profitability.
PowerSchool's acquisition of SchoolMessenger stands out not just for its strategic fit but also for its financial allure, being a more profitable entity than PowerSchool's existing EBITDA multiples. Such synergy is expected to incrementally improve annual recurring revenue by around 5%. However, in the fourth quarter, we might not see a strong financial contribution from this acquisition due to the necessary investments for integration. Yet, as the company sails into 2024, SchoolMessenger's impact is anticipated to grow, becoming accretive to PowerSchool's earnings sometime in the middle of the year after the initial investment phase.
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Good afternoon, and welcome to the PowerSchool Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Shane Harrison, Senior Vice President, Investor Relations. Please go ahead.
Thank you, operator. Welcome, everyone, to PowerSchool's earnings conference call for the third quarter ended September 30, 2023. I wanted to first let you know that we posted a slide deck to the Investor Relations section of our website that accompanies our remarks here. On the call today, we have PowerSchool CEO, Hardeep Gulati; and President and CFO, Eric Shander.
Before getting started, I'd like to emphasize that this call, including the Q&A portion, will include statements related to the expected future results for our company, which are therefore forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings.
Today's remarks will also include references to non-GAAP financial measures. Additional information, including definitions and reconciliations between non-GAAP financial information to the GAAP financial information, is provided in the corresponding press release and results presentation, which are both posted on PowerSchool's Investor Relations website at investors.powerschool.com. A replay of this call will also be posted to the same website.
I will now turn the call over to Hardeep.
Thank you, Shane, and thank you, everyone, for joining us today. PowerSchool's third quarter was a continuation of the momentum we have been building over the past few quarters with meaningful growth in revenue and profitability. K-12 organizations are accelerating the adoption of our platform to become more efficient and effective, and this is enhancing our ability to execute on our strategies for growth.
Our third quarter results are summarized on Slide 4 of the posted earnings presentation. Revenue was up 12% year-over-year to $182 million, exceeding the high end of our guidance. Product-level growth was diversified with double-digit growth in many of our cloud solutions. Adjusted EBITDA was well ahead of our guidance, reaching $62 million, representing 19% growth over Q3 of 2022 and a 34% margin. We also saw record cash flow in the quarter while continuing to invest in our game-changing product innovations.
ARR grew over 9% year-over-year and was up sequentially in Q3, which is seasonally our lowest quarter for new business as districts are focused on back-to-school opening logistics. We continue to see low double-digit growth in the ARR for the full year excluding SchoolMessenger's contribution. These results showcased the momentum we have created in driving sustainable long-term growth.
Let me now discuss our customer and product momentum in the third quarter, summarized on Slide 5, where we had meaningful customer activity that demonstrated many of our go-to-market strategies. The biggest notable win in Q3 was with the state of Florida Department of Education for several of our talent solutions that will help the state with their recruiting and hiring processes as the industry is experiencing a shortage of talent. The Florida Consortium Job Board will serve all 67 districts, 6 special school districts and over 700 charter schools in the state of Florida to source all talent from all over the country in order to fill vacancies for all job types in the state. This is a competitive replacement of an existing solution and speaks to the strength of the innovation and the capabilities of our talent cloud offerings.
Florida is a great new logo win and another key new state-level contract. With the Florida win, we have now won a state or a territory-level deal in 9 straight quarters. Additionally, we have been given vendor of choice for a state-level special education solution for another state in the Midwest, which we hope to get through signature and approvals in Q4 or early Q1. These states and large deals are very strategic and provide us an opportunity to further expand our customer footprint and cross-sell across all the district and school in these states.
The scalable nature of our platform, the diverse best-in-class footprint and the differentiated innovation are driving the momentum for these state-level deals. Our strong double-digit revenue growth in the quarter was across most of our clouds with strong performance in our Student Information Cloud, Student Success Cloud and Talent Cloud.
The mission criticality of our core platform, the organic innovations of data and insight solutions and our timely add-on acquisitions like curriculum planning and attendance intervention are addressing the most urgent critical needs of the districts. Take for example year-to-date attendance interventions bookings are up 68% year-over-year. Curriculum and instruction bookings grew 200% year-over-year, and talent bookings are up 21% year-to-date versus the same period last year.
As we shared during our last earnings call as well as on our Investor Day, our data-centric solutions are the key part of our long-term growth algorithm. In the third quarter, 5 of our largest 10 wins by ARR included Insights or Connected Intelligence report. This included cross-sells of both Insights and Connected Intelligence to Modesto City School District, Colorado Springs School District 11 and Cherokee County School District 1. These are technology-minded districts that were already using 5 to 10 of our platform solutions and are a great example of how districts of all sizes are seeing the benefit of using our data-centric tools to aggregate, secure, analyze and present the data for making better decisions for their students and teachers.
A key value proposition for data product is also that we are enabling these districts with a Data-as-a-Service platform to power their AI strategies. With our Connected Intelligence data lake solution, we're enabling more secure and efficient way for our customers to bring AI to their data rather than their data to the AI tools.
We continue to innovate on our extensive multiple product AI-centered personalized education road map. In this quarter, we are doing general availability of our first generative AI-based solution for Item & Passage Generation tool as an add-on for our Performance Matters Assessment product after a very successful beta trial.
Additionally, this month, we are kicking off beta trials for 2 other AI products. First is the ability for educators to interact with student data sets using natural language to ask questions and uncover key insights. This functionality will be an add-on to our Connected Intelligence and other products, which will save educators and administrators a tremendous amount of time digging through the massive data sets to find the anomalies, focal areas and other insights into student academic and behavior progress. Also this month, we plan to release the beta for our first version of Personalized Homework Assistant, a gen AI tool for Schoology that understands the context of what is being taught in the classroom and provides assistance to the students who may be stuck on a homework concept.
Next, I would like to update you on the progress of our recent M&A activity, as shown on Slide 6. Since the end of Q2, we have acquired 2 companies, starting with the completion of the exciting acquisition of SchoolMessenger in October. As with all our acquisitions, the first stage of our integration process centers on people and UI harmonization. And our particular focus with SchoolMessenger is building the deep integration of their direct communication capabilities into our new MyPowerSchool single pane of glass portal for parents, students and teachers.
As most parents can attest, the communication process between teachers, families and their schools is disjointed and often confusing. By adding SchoolMessenger to PowerSchool and particularly the MyPowerSchool portal, we are uniquely positioned to create the most differentiated and comprehensive portal for centralized and efficient school-parent communications. This will supercharge the parent-student-teacher communication and therefore drive meaningfully deeper engagement, a leading driver of student success.
During the third quarter, we also acquired Neverskip, an India-based K-12 ERP and administration software provider. The addition of Neverskip provides us with a localized and high-quality ERP and SIS product for the large India K-12 market that is expandable and scalable with PowerSchool's complementary platform of solutions. This addition expands our reach in India by 1.2 million students.
Turning now to our broader global international expansion on Slide 6. As we discussed at our Investor Day, we are approaching targeted regions with a direct sales model, while in others we are building our go-to-market with channel partners. Since our last earnings call in August, we are thrilled to have signed up 6 additional partners, bringing our total to 11 so far, well ahead on our plan to sign 12 by the end of the year.
For the Middle East and Africa regions, we aligned with CCS for the Egypt market and Bahwan CyberTek for Oman and the UAE. In Asia, we signed an agreement with BeeNet, who will resell PowerSchool products in Hong Kong, Singapore and the Philippines. Our first partner in Europe, Gear Education, will focus on selling in Greece and Cyprus. For the Brazil market, a country with over 37 million primary and secondary school students, we are aligned with LearnBase. And finally, in the New Zealand, we selected Glenn Cook Technologies as our latest channel partner. We look forward to onboarding each of these and our other partners in the coming quarters with the goal of driving meaningful growth of PowerSchool outside of North America.
These third quarter successes are driven by the strategies we presented at our Investor Day in September when we outlined our vision to personalize education as well as our clear path to $1 billion in revenue and adjusted EBITDA margin in the upper 30s, as summarized on Slide 7. At the event, we showcased our unique and differentiated position as the most comprehensive vertical SaaS platform for a very durable K-12 end market. We discussed how we remain underpenetrated at roughly 6% of the $10.5 billion addressable U.S. and Canada K-12 software market and how this TAM expands nearly 10x to $100 billion when you consider our opportunities in international expansion and personalized education.
We articulated our go-to-market strategy, reviewed key growth drivers and detailed our playbook for expanding internationally through multiple channels. We also showed our product road map, including many of the [ signing ] gen AI and personalized education products that we believe will transform the future of the industry. Then Eric wrapped up the day by laying out clear midterm financial targets, including the detailed levers we will employ to generate over $1 billion in revenue by 2026 while expanding EBITDA and free cash flow margins. For anyone who has not reviewed the Investor Day presentation, we encourage you to do so via our Investor Relations website.
Q3 was a great quarter for PowerSchool. Our teams have built momentum in many facets of our business. We continue to build scale and execute efficiently, deliver meaningful value for our customers and develop our global reach. I am confident in driving durable and efficient growth in both our top and bottom lines.
With that, let me pass the call over to Eric to cover the financial performance for the quarter.
Thank you, Hardeep. We delivered a strong third quarter highlighted by double-digit revenue growth, margin expansion and record cash flow generation. We saw balanced demand across our product portfolio during a busy back-to-school season with particular strength in our data and analytics solutions. As summarized on Slide 8, we delivered third quarter total revenue of $182 million, representing a 12% year-over-year increase and exceeding the high end of our guidance range we provided in the last earnings call. Subscriptions and support grew 9% year-over-year to $149 million and accounted for 82% of total revenue in the quarter, driven by a strong renewal season, good bookings activity in which our teams drove ARR through new logos, cross-sell and upsell. Services revenue totaled $21 million in the quarter, representing 4% growth over the same time period last year, which continues to reflect the efficiency and increased productivity of our services organization. Revenue from license and other totaled $12.5 million for the quarter, more than doubling over the same time period last year. The main driver was the delivery of our new solution of attendance and security tracking across all schools in Puerto Rico.
We ended the quarter with an annual recurring balance of $640 million, representing a 9% year-over-year increase as we continue to acquire new logos, cross-sell and upsell to existing customers and maintained strong retention rates. As we've discussed previously, the quarterly variability is attributed to seasonality and the timing of our larger and strategic deals. We continue to expect low double-digit growth in ARR for the full year, excluding the addition of the ARR from SchoolMessenger, which closed early in the fourth quarter.
Our net revenue retention rate came in at 107.2%, down 150 basis points year-over-year, however, up 160 basis points from Q3 of 2021. As I've discussed previously, we can see a sequential NRR decline in Q3 given that a high volume of our renewals occur during the third quarter, and in Q3 of 2022, we had the benefit of 2 very large deals impacting this metric.
Adjusted gross profit for the quarter came in at $129 million with a 71% margin, representing a 260 basis point year-over-year improvement driven by continued operational scale and lowering hosting costs.
Moving to the third quarter operating expenses. Non-GAAP research and development expense came in at $23 million, representing 12.4% of revenue compared with 13.9% in the same time period last year. This 150 basis point reduction in adjusted R&D as a percentage of revenue reflects the efficiency and improved cost profile of our R&D model while we continue to invest in game-changing innovation to drive long-term growth. Including capitalized R&D expenses, the total invested in R&D was 17.2% of revenue compared with 21.5% last year, representing a 430 basis point improvement.
Non-GAAP SG&A expense totaled $45 million in the third quarter, representing 24.6% of revenue compared with $37 million or 22.8% of revenue in the third quarter of last year. The increase reflects the investments we are making in our sales and marketing organization and our international go-to-market activities that will drive long-term growth.
Third quarter adjusted EBITDA exceeded the high end of our guidance range, coming in at $62 million, representing a 34% margin, which was 190 basis points better than last year and driven by our continued focus on cost management and a strong performance in L&O revenue. Non-GAAP net income in the third quarter was $0.24 per fully diluted share, up $0.03 or 15% from the $0.21 per diluted share we had in the same time period last year.
Free cash flow in the third quarter, which is seasonally our strongest cash flow quarter, was a record $211 million compared with $174 million in the same time period last year. Our free cash flow margin for the 9 months ended September 30, 2023, was 19% compared with 15% in the same time period last year. Strong collections and working capital improvements contributed to the free cash flow increase.
Moving to the balance sheet. We ended the quarter with $323 million in cash and equivalents, an increase of 197% over the same time period last year. This balance included the upside $100 million term loan, which we used to finance the SchoolMessenger acquisition in Q4. Net debt leverage at the end of the quarter was 2.3x compared with 3.6x a year earlier.
Now turning to our fourth quarter and full year 2023 financial outlook on Slide 9. For the fourth quarter, we expect total revenue in the range of $182 million to $185 million, representing 14% year-over-year growth at the midpoint, which includes our expectations for SchoolMessenger. This outlook also includes our expectation that both services and license and other revenue will be lower than the prior year. This is due to our services team continuing to improve their productivity levels and the timing of L&O revenue in the fourth quarter.
We expect fourth quarter adjusted EBITDA to be in the range of $56 million to $58 million, representing a 31.1% margin at the midpoint. This guidance includes the platform integration investments we are making in the SchoolMessenger business that Hardeep mentioned.
For the full year 2023, we are increasing our guidance ranges for both revenue and adjusted EBITDA. For 2023 revenue, we now expect to finish in the range of $697.5 million to $700.5 million, representing an 11% growth at the midpoint. For the full year 2023 adjusted EBITDA, we now expect to finish in the range of $229 million to $231 million, representing a 32.9% margin at the midpoint, which represents a 40 basis point improvement from our original guidance at the beginning of the year and includes all of the SchoolMessenger investments we are making in the fourth quarter.
For modeling purposes, we expect full year capital expenditures, including capitalized software, of approximately $40 million to $42 million and share-based compensation expense of approximately $64 million to $67 million. Fully diluted shares by the end of the year are expected to be in the range of 202 million to 205 million shares.
Overall, we're pleased with the results we saw in Q3. Our teams are executing the strategies for revenue and profit growth very well. I'm particularly happy with our progress on cash flow throughout the year.
We're looking forward to finishing 2023 strong, where we expect to deliver low double-digit growth in ARR and meaningful margin expansion. This financial momentum reflects our strong business model and durability to grow both top line and profitability while continuing to invest significantly in long-term growth with our next-generation product investments, which we believe will position PowerSchool, our customers and students all over the world for a long future of success.
I will stop here and ask the operator to please open the line for Q&A.
[Operator Instructions] Our first question today is from Saket Kalia with Barclays.
Hardeep, maybe we'll start with you. One of your competitors just recently kind of called out a little bit more activity in the K-12 market because of sort of ESSER funding and the associated time lines. Now I think you and the PowerSchool team have been very consistent in sort of talking about it as a helpful item, right, but not necessarily as discrete of a catalyst. But I'm just wondering, right, as we kind of get deeper and deeper into that time line, can you just talk about what PowerSchool is seeing from that just anecdotally?
Yes, sure, Saket. I think it's very consistent with what we have been saying, and we recently have talked about it at our Investor Day, too, is that it is a helpful item. It provides a good cushion for school districts, especially as they came out of pandemic. There's been a lot of good investments around how -- not just kind of on the school operations, the teachers and services but also on how to make sure that you can accelerate the learning gains for the students.
And as we've talked about, that it remains as a nice cushion to the overall funding environment. But as you know, our software is more for subscription software, and you do need the long-term commitment for that. So most of the districts would actually spend our dollars for our software [ over the long ] budget.
With that said, if there is an implementation or early deployments, they might use ESSER funds to be able to get that going as well. And we do see some benefits there, especially on some of the projects, but we have been -- it hasn't had any material impact. We do see that for another year. As you mentioned that there is still about a good chunk which is not spent. Some of that has been earmarked, but there's still areas that districts continue to look at that. And we do get to provide a lot of services and support for districts around that as well.
Got it. Got it. That's very helpful. Eric, maybe for you for my follow-up. Can you just remind us kind of how much SchoolMessenger is adding to ARR revenue and EBITDA this year. And I know that it's too early to kind of guide to '24, but how should we sort of be thinking about SchoolMessenger on sort of an annual basis as we layer into our models?
So good to hear from you. So as we've been talking to all of you when we were looking at the SchoolMessenger business, one of the things that really attracted us to this company, not only just the strategic fit but also the profitability of the business. So what I would say in terms of the best proxy for looking at the financials is if you take the PWSC or the PowerSchool EBITDA multiples, assume a couple of turns better, you can get, if you will, I think, a nice framework for the way to think about the financials. As we're continuing to -- we're knee-deep into the planning phases right now, so still early stages for 2024, but we're certainly really optimistic in terms of the contribution it's going to have.
In terms of ARR, I would -- at this point in time, my best estimate would be a 5-or-so percent incremental from an annual perspective. It could be a little bit more than that, but we're still kind of working through some of the buildup of the ARR as we work with the SchoolMessenger team.
The next question is from Brian Peterson with Raymond James.
So Eric, I wanted to hit on the ARR trends. I know there's some moving parts in the NRR, but we saw that moderate a bit, but ARR growth held relatively steady. Is it fair to read that as kind of the net new was stronger this quarter? Am I reading that right? And if so, any color on what drove that?
Yes. Look, we have and we continue to see really good momentum in terms of the net new. And as I mentioned in my prepared remarks, we're still estimating ARR to be in the low double digits for the full year. So really good, continued momentum there.
One thing just for everybody to keep in mind. And you'll recall last quarter, we had the LAUSD transaction, which ended up being a license and other opportunity versus going into ARR. So again, there's going to be a couple of moving parts related to the bigger pieces, but we did see a good part of the net new business in the quarter.
Great. I appreciate the perspective on that. And Hardeep, it sounds like the international partner traction is ramping up quicker than expected. Does that change the time line in which we should expect revenue on that road map? I'd love to get the color there.
Sure. Thanks, Brian. Just adding to the last point, Brian, about your question about the net new logo, I think one of the -- in the prepared remarks, I talked about Florida DOE deal on talent management. Again, that's a net deal of a sizable state rollout of our talent solutions -- of multiple of our talent solutions across the entire state, for the Job Board as well as ATS, so application tracking for a good chunk of the districts in the state. So a great story for our net new logo, and we saw a few more of that as well.
So moving to the other question. You're asking about the international. Absolutely, we are actually ahead. In fact, I think we are literally hours away from signing [ over 12 months ]. We basically would have all over 12 partners we were initially targeting and probably exceed that for the year as well.
And more importantly is that we have -- one of our key strategic element was coverage. And having the strategic exclusive partners that is covering -- allowing us to cover the most of the important global growth markets that we wanted to really make a mark, and we have done a phenomenal job of getting that. There is still a lot of hard work to get these partners fully enabled, get them -- the sales engine going. We're already seeing some of traction of that within the quarter. Especially in Egypt, for example, our partner, we already kind of had a good enablement and good traction on some of the deals. Saudi Arabia being another one. And we are seeing similarly Latin America to be a bright spot.
I think if you look through the international traction, look through our India push, both acquisitions as well as organic, I think we do think it is setting us up pretty well for next year growth. And we do expect that to be kind of a little slightly ahead of the plan, but more -- I would say over the -- what we've talked about, 3 to 5 years, we will be about $80 million to $100 million of business. I think we'll be very much on track on it.
The next question is from Ryan MacDonald with Needham & Company.
Congrats on a nice quarter here. Hardeep, I'm curious on the India acquisition, what sort of drove the decision of sort of buying versus partnering as you're entering that market? And as we think about sort of guidance -- or not guidance for next year but fourth quarter, how much revenue and sort of margin are you expecting from a contribution perspective from that acquisition?
Sure. I can start that, and I'll ask Eric to feel for to jump in as well on the numbers. So Ryan, I think on the -- when you look at from the India market, first to just define you the market, it's actually one of the largest education markets in the world, right? 230 million K-12 students. 50 million plus of them are in actually private schools. So it's a very -- think about it from a size perspective, as big as U.S. just in the private school market itself, even outside the government schools as well. So it is a very attractive market for us. We also have a pretty sizable presence with our offshore center with almost 200-plus people there. So we have very strong capabilities to excel there. We have -- over the last couple of quarters, as we have put boots on ground on sales side, we actually saw pretty good traction of our Schoology product. We saw a lot of good traction on some of our even interest in analytics. But one of the areas we would continuously get on the SIS side was a little bit more localization required, especially around ERP, payments and some of the transportation and other logistics element for the local.
So what we looked at is that it was great to have bringing an acquisition, which actually gives us a localization, still allows us to bring our broader platform to the Indian market, especially over classroom and analytics products, marry that with our SIS for larger, bigger opportunities, for a more bigger rollout. And you now have a perfect combination for something which is not present in the India market. Most of the market who has been addressed for the 50 million is through small shops.
So now this is also -- while it's -- already has about 1.2 million students out of the 50 million students that we talked about from private school, it's still a small company. So you talk about a couple of dollars per student typical pricing, right? So it's a very small acquisition. But what it does give us is it gives us about 900 schools proof point where we can cross-sell, start selling the broader vision.
And also we're looking at more strategic partnerships and we've been -- for potential future acquisitions so we can kind of fill in the full platform including some of the assessments and curriculum around -- for the India market, which will allow us to really enter that market in a big way. So it's an exciting market. I'm really excited about this acquisition. Even though it's small, I think it's going to be very strategic over the long run for us.
Yes. I would just -- Ryan, I would just say in terms of -- as you think about the financials, as Hardeep mentioned, fairly immaterial, as you would expect with any tuck-in that we do. But again, for all the reasons that Hardeep mentioned, it really is you bring it into our distribution engine and our ability to be able to scale it. That's what really gave us access to the 900-plus schools. So the financial contribution will be relatively immaterial in the fourth quarter. But again, as we start to scale and as we start to build it up, we'll start to see that momentum really increase as we get into 2024 and beyond.
Maybe just as a quick follow-up on SchoolMessenger. I think you talked about that acquisition having the potential to be accretive to overall EBITDA margins. But you also talked about sort of deep investment in the near term on integrating from a technology perspective. Should we expect sort of that accretion to happen in the next couple of quarters out? Or even with that investment, are you assuming that it would be immediately accretive?
Yes. So Ryan, great question. So one of the things that really got us excited about SchoolMessenger is really bringing it into our MyPowerSchool, which is the single pane of view for teachers and students, et cetera. So we are going to take a quarter or 2 for some investments that we're making for that integration. But post that, I would say, middle part of next year, you will start to see it be accretive to the company. But there is going to be some upfront implementation and integration work that we're doing. So it's going to be a quarter or 2 that we'll focus in on that. And then obviously, it was a profitable company prior to the acquisition, and we believe that we will get it back to that spot and probably even have some further leverage beyond that.
The next question is from Stephen Sheldon with William Blair.
You got Pat McIlwee on for Stephen today. So just kind of further on some of these prior questions. You put up really nice profit this quarter with an EBITDA margin of 34%. And I know you mentioned there's going to be some expense related to SchoolMessenger in the fourth quarter, but that guidance for the quarter implies a margin of 31%. So just wanted to ask how we should think about that step down, if that's all -- for the most part SchoolMessenger or whether or not there are any other considerations on that front that are worth calling out.
Yes. No, it's a great question. And I think the most important way to kind of think about this, there is some timing of activity between Q3 and Q4. As I mentioned in my prepared remarks, there was some L&O activity that happened in Q3 that timing of it could have been Q3, Q4. It could have been either or, but we saw some of that happen in Q3. But what I think is most important is if you think about the full year from an adjusted EBITDA perspective, we are raising by $2 million. We are investing in this integration work that we have. We're super pleased with the Q3 performance.
And what I would say is as you think about the full year, we'll end the full year around 33% in total. That's going to be up 2 points from where we ended full year 2022, which, again, is a full percentage point above our financial model. So we're hitting on all cylinders from a profit standpoint. So again, it's just going to be some minor quarter variability, but I think it's the most important to kind of think about where we're going to be for the full year.
Yes. Understood. And then my second question. You said ARR for data products. I think in the past -- maybe last quarter was up almost 100% year-over-year. And it sounds like traction there is -- continue to be really strong this quarter. Is there any additional color you can give on what exactly customers are using these products for at this point and then how you might expect that to evolve in the coming quarters and years?
Sure, Patrick. You're absolutely right, our growth rate continues to be pretty strong. And there are multiple use cases we are actually seeing. We saw a lot of use case first for understanding student engagement, right, in terms of, hey, where are my students, who's showing up on the class, what kind of performance we have. We saw that use case has further evolved into what we call MTSS, multi-tier system of support. We actually launched this a couple -- 2 years back and, in fact, had full rollout of this even at a state level in Alabama for the coming school year where every school district in Alabama has a full MTSS support for every student where they can comprehensively look at interventions and support programs for each student.
If a kid is not pretending, you have support plans and intervention strategy for that. If a kid is behind on the academic side, how do you provide support for them. If kid has social, emotional, what support [ or ] strategies would be required for there. And similarly, you can keep going on career pathways and basically driving a very comprehensive way for supporting every student depending upon their individual need but scaling it to be able to do that at a district level, at a state level and bringing all the resources. And that has been one of the huge growth areas over the last, call it, 12, 18 months.
But we're also seeing a huge amount of interest now on Connected Intelligence. On the data product element, we're just bringing one data source where it actually is your data sandbox or you kind of think about your data lake. You're bringing data not just from PowerSchool systems, from your other systems, being able to have all kind of reporting and correlations, things which you may not even understand of where the challenges are, being able to have the data tell you that and also being able to have that as your [indiscernible] for security, being able to have it for your -- being able to have a long-term audit as well on that.
So it has become a very strong data along with the Insights strategy, and we are seeing interest as we talked about the huge LA deal, Montana deal around not just the data strategy but tying it up to even workforce planning. So you can have a K-20 view on your students and understand where the students are and how you're going to support them. So these use cases continue to be really expansive.
One of the very exciting things to you in terms of future, what we are seeing is actually interest around AI and how -- think about how this Connected Intelligence is letting districts be able to use -- where they can bring their AI to the data so they can actually run their AI tools on top of Connected Intelligence rather than taking all the data and putting in the AI tools and having not -- risk of security and everything with these new technologies.
So that has been also of very strong interest. We do expect -- we are launching a lot of focus on educator analytics as well. That's going to be a phenomenal growth area for us as well and also on the career in K-20 broadly. So we do see this to be one of our highest growth area, and you're going to see continued very exciting opportunities here.
The next question is from Gabriela Borges with Goldman Sachs.
This is Callie Valenti on for Gabriela. Congrats on the quarter. First one for me would be, since the Investor Day, I've seen a few more press releases with deals that include kind of SIS plus some of the recent add-on functionality you've acquired or built out maybe in the customer space or some of the other modules. They seem very complementary to like the core SIS system though. And I wanted to ask, how important have these add-on modules been such as like special programs or behavioral support to the success you've been seeing in SIS and then just more broadly?
Great question, Callie, and great to talk to you. I think, Callie, one of the things that I remember we talked about in the Investor Day with you was our -- how we are launching our clouds, right, rather than selling individual products but selling multiple add-on products like forms management, document management, special education. Similarly in the classroom, not just trying to sell LMS or assessment but also selling curriculum and instruction and selling behavior as we are looking at the student success, not just MTSS but also selling attendance interventions so -- and behavior elements, so you can actually look at the holistic way of providing support.
We are seeing a good cross-sell of multiple of these modules happening at the same time. So that's what you're observing in the press release and our traction. We also talked about -- in our prepared remarks that when you look at the growth of some of our add-on acquisition, this is where our strategy is working very well. The timeliness of our innovation on things like MTSS and Connected Intelligence but also our add-on acquisition like attendance interventions and curriculum, these are very timely based on what we are seeing as one of the key demand in the market.
So being able to have the pulse of the 80% of the U.S. market and being able to quickly have the partnerships as well as add-on and acquisitions to react quickly to top needs is allowing us to really drive additional growth in the market based on what is the most important thing for our districts. And you're actually right. If you think about from a school district perspective, there a lot of urban school districts who are worried about, how do I get my enrollment and how do I get more attendance. So then this intervention really speaks to that, and that's why you're seeing good growth.
There are a lot of discussion about curriculum and making sure that teachers have a standardized curriculum, so you can be compliant with the state policy. That's driving a lot of curriculum. And as you talk about SEL and behavior, there are still a lot of kids who are still struggling from the social, emotional side and giving them the support. So we are really addressing the most important things that our districts care about.
That makes sense. And then just second one for me quickly. I wanted to dig into the full year guidance a little bit. I know people have asked about this in a few different ways, but just to clarify, is there any portion of the like $8 million increase in full year guidance that's coming from outside of those 2 acquisitions you did?
So yes, as you think about it, majority of it is going to be acquisition related. So -- and I think while -- Callie, it's a good question. I think what's important, too, while I'm addressing this, as you think about the full year is absolutely in line with our expectations. What's important to understand, there has been a mix shift, if you will, between the categories. So our services business, given the fact that we've gotten more productive and more efficient as a team, services is coming in lower than our original expectations. That's absolutely good because the team is being more efficient and productive. And obviously, that revenue comes with a bit lower of a margin as well.
As you look at the full year though, and I think it's important, and Hardeep and I look at not just the subs and support, but then also the L&O because we look at that as the, if you will, the software component of the revenue pie. That's still going to be in the low double digits growth from a full year perspective. So a bit of a mix shift across some of the components, but again, as you think about the full year, it's very much in line with our expectations.
The next question is from Matt Hedberg with RBC Capital Markets.
Hardeep, earlier on in the call, you -- I think you said -- you talked about some gen AI SKUs, products that were kind of just rolled out this quarter. I'm sort of curious, could you comment on any sort of thoughts on like pricing or adoption or just how we should think about the eventual -- obviously, it would probably be slow at first. But just kind of how do we think about the monetization side of that?
Great point, Matt. And we are really excited about some of the innovation we're putting on gen AI. I think when you look at from what we are seeing as not just the differentiation in the market but also from our ability to really do this at scale and embed it into the current applications these -- our districts are already used to, we have a very unique proposition for school districts. And that's why we're getting a lot of strong interest from multiple of districts and even some state level.
And one of the things what you will see is that these are individual areas of one of the products we talked about in the Performance Matters. I want to be able to have new items and want to be able to create quiz. Well, we are making a GA of that product. I want to be able to create a full lesson plan. I want to have a tutoring help for my kids within Schoology. Well, that's going to be, again, add-on to Schoology. We will have an add-on for our Connected Intelligence, Unified Insights because I'm going to be able to assess quickly the data and have gen AI help me assist and find the areas rather than me navigating. So that's going to be an add-on to all of our data products.
We are launching similarly on our parent side and within My PowerSchool and SchoolMessenger having a whole parent communication gen AI tool, which allows you to engage with the parents in a way that your parents can actually talk to the -- be able to use gen AI to understand how they can support their child and interact with the school. So these are phenomenal opportunities, even with the bigger picture outside of the personalized homework, which is a huge opportunity, for coaching for teachers.
We are -- these are all going to be add-on with multimillion-dollar product lines over the next couple of years, and you will start seeing monetization of that similar to how we monetize our other products, a couple of dollars per student. And on top of that is the data strategy. As I talked about, our Connected Intelligence is becoming the choice of platform for districts for their AI strategy. So we're supporting a broader AI marketplace of how any [ PreK ] district or who's a PowerSchool district wants to use another AI tool, they will use our platform on data as a way to enable their strategy. So we'll be able to monetize that whole Connected Intelligence at these districts as well.
The next question is from Joe Vruwink with Baird.
I wanted to follow up on the big talent management deal in Florida. I think recently, PowerSchool and some of your peers have mentioned the back office solutions like human capital and ERP that's maybe been an area put on the back burner in 2023, but you see it in your pipeline that there's pent-up demand. Would you say the activity in 3Q is an indication maybe the pent-up demand is starting to unlock? Or is it too soon to make that declaration?
Good question. So I think some time back, we do club both the talent piece and ERP because that's typically sold to the HR and the CFO. So they kind of -- from a buying perspective, that's a common buyer. So when we group them, our solutions and cloud by buyers, you kind of see them grouped up. But when you look at the talent by itself, this is recruiting teachers, onboarding them, professional development of teachers, substitute teachers, those product lines actually have been growing double digit consistently. In fact, I shared that if you look at year-to-date of new business, that has grown more than 20%. . So we have been able to see double-digit growth on our talent product consistently. Even prior to pandemic, during pandemic, even in post-pandemic, that continues to be very healthy. Some of the innovation we have put actually is now allowing us to even displace our nearest competitor like in the case of Florida. And we're actually seeing good traction on that, that we are becoming a clear leader for talent products in the market in K-12.
Now ERP is a market which still has been slow. And post -- while we saw good traction pre-pandemic, post-pandemic, it has really gone slow. And that continues to track to be in the low single digits. We do expect that 70% of the market being still legacy. As districts come out of their overall and get to a normal cadence, we are seeing some opportunities. And I think it will be a couple of years before we start drilling the growth there. But we do see pockets within there that could be very interesting for us for immediate -- in the near future, which we are tracking.
Okay. And then I wanted to ask, it's 2 big quarters in a row of license strength. I know this is really a strategic emphasis. But just the sheer magnitude of some of these deals? I mean with license, you do get follow-on support contracts typically. So there is a recurring component that comes. I'm just wondering if you're seeing any decided shift in kind of buying preference where licenses might be in vogue for a period of time, and as it gives you a good relationship at a strategic account, we could actually see more license activity over the next year.
Yes. So Joe, it's Eric. I'll take that. So I think you guys know, obviously, in this quarter, there was about $4.5 or so million related to Puerto Rico that we've previously been talking about. But aside from that, there are deals such as LAUSD, where it was a strategic discussion with the customer. And it was more or less their desire in terms of how they wanted to utilize the software.
I think what I would say, I'm not sure it's going to be an emerging trend, if you will. But from our standpoint, we always will take the customers' consideration in. And if there's a deal that's most appropriately structured where it's more of a point-in-time type transaction, we'll absolutely do it. But L&O even internally is probably the hardest number for us to forecast because these items can be from any one quarter, can be a little bit higher or lower depending upon when they actually happen in the quarter.
So we're going to continue to monitor it, but I wouldn't necessarily leave the call thinking that, hey, there's going to be a tremendous amount of L&O next year because I just -- we just don't see it. There's going to be one-off deals from time to time, and we absolutely will be very transparent with the Street in terms of what those deals are and why they happen. But we don't necessarily see it as more of a pervasive trend.
The next question is from Brett Knoblauch with Cantor Fitzgerald.
Just curious as to the historic -- or I guess maybe historical acquisitions you guys have made, how they played out from a growth perspective. I know the main focus is going to be on integrating. But I guess when do you normally begin to turn on the upsell motion to existing customers? Is that something we should expect to happen maybe come 3Q of next year, that's when most renewals occur?
Yes. So Brett, I think it's a good question. And what I would say is it will depend on the type of acquisition we make. So where we make smaller technical tuck-ins, whether it's like a Kinvolved or Kickboard or a Chalk, those pretty much happened in the next quarter. And putting those into our sales distribution engine, we get an immediate pop on those.
When you're talking about a strategic asset like SchoolMessenger, we're absolutely focused, first and foremost, on integrating the product and getting the team settled. It's a sizable team that we've acquired as well. Making sure that all of the operational elements are in place. Meanwhile, our sales team is certainly building their plans in the pipeline and all of that.
So I would say that the business momentum will continue. You'll start to probably see an uptick in that particular space most likely in the second half of next year, as you mentioned, when we start seeing the renewals activity and a lot of the integration work is behind us.
The next question is from Fred Havemeyer with Macquarie.
I think I wanted to clarify something from a little bit earlier there, Eric. Did I -- I might have misheard this, too. Did I hear that the Puerto Rico deal was coming across in the license revenue line this quarter?
So just the scanner, the hardware part of it was. There's obviously a -- yes, so that's the only piece. There's obviously a services component of it as well as the subscription piece that came into the quarter.
Got it. And I wanted to ask, last quarter, I think you're talking about how implementation times could lead to some subscription revenues, particularly larger deals, lagging ARR. So I wanted to ask, is that a persistent trend that's tracking this quarter as well?
Not this quarter necessarily. I mean typically, you'll see that when you have extraordinarily large deals like a Puerto Rico where there's 250,000 students, large system implementation. You'll see the ARR recognized much quicker than the actual system gets turned over to the region, and then they start using it. So that was more pronounced previously when -- as you look at Q2, Q3. But we haven't seen deals of that size which would cause that delay, if you will, between ARR and revenue.
Got it. And then, Hardeep, I spent a while in my end reading through the White House's AI executive order. And they spent at least a portion of it talking about their interest in generative AI and forming policy there, which will take place over the next year and change. So just curious if you have any initial thoughts about how the White House and U.S. government might be approaching generative AI. Generative AI and education specifically.
Yes, sure, Fred. And just maybe adding to the last question first, Fred, I think it's very exciting, to Eric's point, about some of the big implementations that we've already achieved in the last quarter, so something to call out. We went live with Puerto Rico in record time, which is one of the biggest implementation of SIS in the about 7 months. And think about the complexity in Puerto Rico with 270,000 students, every parent using our system for the related support card. So it's a phenomenal stride, which is another phenomenal go-live on the multiple of their schools with the virtual schools, Maarif in Saudi Arabia. So we had some -- and Alabama with our Insights and LA with our Connected Intelligence. So very exciting go-lives as well, which actually this quarter was very, very timely. I think your point about the generative AI, we are very much plugged into the policy as well as the ethics and the making sure that there is not a bias in the generative AI. In fact, one of the strengths of PowerSchool strategy compared to a lot of companies who will either come from non-K-12 or don't have the data or relationship with the district is that they don't have the opportunity to really factor in the district policies, the state standards as well as to be able to do this at scale and provide the assurance that it's going to have the broader policy elements factored in. And that makes a huge advantage for us in our strategy.
So we are seeing not just districts and state but even charter schools and CMOs and private schools who are actually looking at us to be their partner in helping up shape that strategy to make sure they roll out these AIs in the right way. And having -- starting with the data strategy to make sure that the data elements are being used are -- there is identification, and all the elements of those are factored in, and then looking at the experience around how they can take advantage of the generative AI. So we are really in a very unique advantage position to be able to support districts, to be able to align to the federal policies as well.
The next question is from Koji Ikeda with Bank of America Securities.
This is George McGreehan on for Koji. I was wondering if you could kind of talk about when you look at the cohort of districts that have adopted several products and maybe the cohort that has fewer than several. Could you talk about -- are there any kind of differences there just in kind of like the -- any commonalities between those cohorts and then kind of what you kind of do to help drive that upsell?
This is a great question. In fact, we tackled this at length in our Investor Day where we talked about if you think about 20% of your customers are contributing right now to 60% of ARR and these are the customers who are actually using 4-plus products, and you look at over the last couple of years -- over the last 4 years, we have grown that base by 34%. So [ double of over ] 17% growth overall has been over the last 4 years. So to your point, there is very specific cohorts around when you have more than 4-plus products, you're going to actually do more growth. And you're going to buy faster with us, and you're going to get more value. So there is a lot of interest on -- but the exciting also part is 80% of our customers still doesn't have 4-plus products. So as we get more of our customers entrenched with 1 or 2 more products, get them into that cohort, we see exploration of growth. So a big focus for us with the cloud as well as go-to-market is getting more of our customers adopted on multiple products.
This concludes our question-and-answer session. I would like to turn the conference back over to Hardeep Gulati for any closing remarks.
Thank you, operator. Thank you again for -- everyone, for joining us today. We are really looking forward to an exciting finishing of 2023. As you saw, a very strong quarter with both -- be it on guidance on revenue and EBITDA. We are really looking at how we can continue to execute into not just 2023 but 2024 and continue to deliver on the double-digit growth we shared at our Investor Day and [ build ] our path to $1 billion in the next 3 years both on top line and also 36% plus on our EBITDA profile, which we talked about. So runway for PowerSchool is very exciting. As we talked about, we're less than 6% penetrated. Huge opportunity, and our innovation is going to [indiscernible]. Really, I want to thank all of our PowerSchool team, our customers and our investors for continuing to believe in us, allowing us to really transform education and bring personalized education to every child. Thank you, everyone.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.